Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

210 Money, Bank Credit, and Economic CyclesBanks expand credit and deposits on their own and also participatein processes which bring about even greater creditand deposit expansion in the banking system as a whole.Moreover, in this process banks strive to play an increasinglyimportant role with respect to other banks, and as a result theycontinually provide fresh impetus to credit expansion on thelevel of individual banks and in the banking system as awhole. In any case, k is a crucial factor in determining a bank’searning power. Competition between banks keeps k significantlybelow 1, however each bank fights to continually raisethe value of its k factor. To do so banks take advantage of theiropportunities (with respect to geographic expansion, the abilityto exclude or take over competitors and the developmentof competitive advantages). 25 Though a k factor equal to one isimpossible for an isolated bank (except in the case of a monopolisticbank), k values significantly greater than zero are verycommon, and under almost all circumstances, banks make asupreme effort to increase k. Among other phenomena, thisexplains the constant pressure they face to merge with otherbanks.For illustrative purposes, we have compiled the followingtable of different combinations of reserve ratios, c, and percentagesof loans unused or customers banking with the sameinstitution, k, which allow an isolated bank to alone double itsmoney supply (by substituting these values into formula [3],we obtain x=d).25 In some cases banks even pay interest to their checking-account holdersin order to attract and keep new deposits. As a result, they ultimatelyreduce the large profit margins reflected in entry (15). This does notaffect our essential argument nor banks’ capacity to create deposits,their main source of profit. In the words of Mises, in this competitiveprocess “some banks have gone too far and endangered their solvency.”Mises, Human Action, p. 464.